Market Close Jun 24

Gold, Xiaomi shine in risk-off market ahead of IMF forecast

Risk rally halted by infections spike; Goldbugs eye $1,800; IMF global growth projections expected to be downgraded after recent comments

Gold, Xiaomi shine in risk-off market ahead of IMF forecast
Personell of a mobile testing unit of the German Red Cross and the German army (Bundeswehr) prepare for collecting Covid-19 tests from employees of Toennies abatoir, at their residential homes in Verl, western Germany on June 23, 2020, amid the novel coronavirus pandemic. German authorities ordered a new lockdown for the entire district of Guetersloh -- the first since easing coronavirus restrictions and a major setback for hopes of a swift return to normality. The lockdown would affect 360,000 people and would stay in place until at least June 30. Ina FASSBENDER / AFP

Hong Kong: (ATF) Financial markets took a step back on Wednesday after a spike in coronavirus cases in several countries and amid worries investors had been too optimistic in predicting the momentum of the recovery.  

“The markets were too fast in pricing the end of the lockdown and the recovery ahead,” said Pascal Blanque, Group Chief Investment Officer at Amundi Asset Management. 

“Current valuations are the result of a liquidity-driven rally and are being sustained in the short term only thanks to continued aggressive monetary expansion,” Blanque said. “In the second part of the year a reality check on earnings growth has to be considered and we suggest combining a high level of liquidity with some exposure to cyclical assets that offer high performance potential in the event that a favourable scenario plays out.”

The Nikkei 225 ended marginally lower and the S&P ASX 200 inched up 0.19%. The Hang Seng index retreated 0.5% after Tuesday’s sharp rally and China’s benchmark CSI300 added 0.42% as Beijing said it can now administer more than 300,000 nucleic acid tests per day compared with 40,000 in March. The fast-track approach comes even as officials said the coronavirus outbreak that began at a wholesale food market in Beijing is under control.

Gold rose 0.2% and US Treasuries climbed, with the 10-year yield declining a basis point to 0.7%.

Analysts expect a breakout in gold prices. 

“The precious metal broke out of its recent consolidation at the back end of last week, taking out key resistance around $1745,” said Fawad Razaqzada, Market Analyst at TF Global Markets. “The metal hasn’t looked back since, as every short-term dip has been supported. For a long as price holds $1745 now, the path of least resistance would remain to the upside. The bulls are eyeing $1800 next, where we may see some profit-taking should gold get there.”

Some trepidation has also set in ahead of the IMF’s release of new 2020 growth projections on Wednesday at 1300 GMT.

The release assumes greater importance after the institution’s Gerry Rice said last Thursday: “The de facto lockdown in the US has continued for longer than we had anticipated … This is likely to mean the contraction in the second quarter will be deeper than we had anticipated previously, and that the pace of recuperation, may be slower.” 

 Earlier in the day, New Zealand’s decision to keep rates unchanged without expanding its quantitative easing (QE) programme, was in line with a Bloomberg poll and has not changed analyst expectations that the central bank will cut rates into negative territory next year.

“The RBNZ reiterated that negative rates will become an option for the Bank in the future,” said Ben Udy, Australia & New Zealand Economist at Capital Economics. “We think the RBNZ will cut rates by 50 basis points in February and by a further 50 basis points in the months that follow.”

Credit markets focused on new issues with the Asia IG index steady at 83/84. The expectations that interest rates will remain low is driving issuers to tap investor hunger for yield. China Aoyuan announced a bond offering and joins the steady stream of Chinese property developers entering the market following the overnight deals priced by Agile, Ronshine, Sino Ocean and Sichuan Languang. China's property market has benefited from accommodative liquidity and credit conditions and sales volumes have rebounded sharply.

“China's property sector has been resilient. Residential property investment and land sales have rebounded sharply over the last few months, and housing sales have also improved quickly despite rising unemployment. The swift recovery could be attributed to relaxed liquidity and credit conditions as well as eased micro-prudential measures,” said Societe Generale analysts Michelle Lam and Wei Yao who expect national housing sales volume to drop by only c.5% in 2020 (or -2% in 2H 2020), compared with 2% growth in 2019.

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Asia Stocks

· Japan’s Nikkei 225 declined 0.06%

· Australia’s S&P ASX 200 inched up 0.19% 

· Hong Kong’s Hang Seng index retreated 0.5%

· China’s CSI300 added 0.42%

· The MSCI Asia Pacific index fell 0.5%.

Stock of the day

Smartphone maker Xiaomi rose as much as 9.7% after it passed a resolution on share buybacks, paving the way for the company to repurchase up to $4.3 billion in shares.